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Below the comment on RBI Monetary Policy Committee by Mr. Mihir Vora, CIO, TRUST Mutual Fund

The Monetary Policy Committee (MPC) meeting is convened against a backdrop of volatile global environment.

The Bank of Japan (BoJ) hiked interest rates by 25 bps last week as inflation continued to remain higher and to arrest the weakening of the Yen against the dollar.

The labor market data released last Friday in the US was much weaker than expected. This raised concerns of a faster slowdown in the US and markets have started pricing in accelerated rate cuts by Federal open market committee (FOMC) for this year.  

The weaker labor market data coupled with tighter BoJ policy resulted in unwinding of Yen Carry trades, which led to sharp corrections in equity markets across the globe and a significant drop in yields for all major economies.

Global uncertainty has resulted in domestic equity markets remaining volatile, while yields on Indian government securities have trended lower. The recent spike in vegetable inflation has resulted in higher food inflation but is expected to moderate in the coming months due to favorable monsoons. Domestic growth continues to remain resilient. Liquidity continues to be in surplus, and over the last few weeks, the RBI has been attempting to drain out surplus liquidity through OMO sales and VRRR auctions.

Monetary Policy Decision

The MPC decided to keep the repo rate unchanged at 6.5%. The stance of the policy also remains unchanged at ‘withdrawal of accommodation’. Both the policy rate and the stance was kept unchanged by a majority vote of 4:2. Two members of the MPC, like in the Jun-24 policy voted for a 25bps cut in Repo rate and a change in stance of the policy to ‘Neutral’.

The tone of the policy was ‘mildly hawkish’.

Domestic Growth continues to be resilient with no change in FY25 projections at 7.2%. Expansion in service sector activity, ongoing revival in private consumption, high-capacity utilization, healthy balance sheet of banks and corporates and Governments thrust on infrastructure spending points to robust growth outlook.

On the inflation front, while there was some comfort on the core inflation coming down, the spike in food inflation has caused headline inflation to remain above 4%. The 2^nd quarter FY25 inflation projection was revised up by 60 bps to 4.4% since the last policy but the FY 25 projections remain unchanged at 4.5%. The policy highlights the risks from volatile and elevated food prices, which may adversely impact inflation expectations and result in spillovers to core inflation. The governor emphasized the need to focus on its disinflationary stance and on price stability to achieve a sustained period of high growth.

The governor in his statement mentioned the potential implications on the emerging markets due to potential growth slowdown in major economies, geopolitical tensions and the unwinding of carry trades causing turmoil in global financial markets. However, he reassured that India’s macroeconomic fundamentals are robust and that strong buffer have been built to mitigate any such global spillovers.

The governor reiterated the need for banks to increase the pace of deposit mobilization. Banks need to exercise greater caution in credit towards personal loans, retail loans used for consumption and top up loans.

Market Reaction

Bond markets have been stable as the policy was in line with expectations. Also, there were no additional measures announced on liquidity absorption. 10-year Government securities yield is likely to trade in the range of 6.75 to 6.90 in the medium term. Liquidity is likely to be in surplus. Yields on Corporate bonds in the 1-3 year segment will stay elevated as they track higher bank deposits rates."

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